Impact of FDI and Its Absorption Capacity on the National Innovation Ecosystems: Evidence from the Largest FDI Recipient Countries of the World

Foreign direct investment (FDI) improves economic growth by stimulating native investment, facilitating technology transfers in the recipient country and increasing human capital development, thus playing a vital role in economic development. On the other hand, innovation is also considered one of the major drivers for the economic growth of a country. This study empirically investigates the impact of FDI and its absorption capacity on the national innovation system of the world’s top five largest FDI recipient countries for the period of 1990–2016. Using two-stage analysis (DEA and Tobit regression), we found that research and development expenditures, researchers in the host country and the number of patents, trademark and industrial design applications are positive drivers of the national innovation systems. Moreover, the FDI inflows positively impact the innovation efficiency in the host countries. However, the strength of this relationship depends on the availability of the absorption capacity of FDI in the host country. The result shows that the global financial crisis and inflation negatively impact the FDI inflows and innovation efficiency in the sample countries. It concludes that FDI inflows and the country’s strength of domestic absorption capacity are essential drivers for developing national innovation ecosystems. JEL Codes: F1, F4, G10, M21